1 Deeply Undervalued Bank I’m Holding for the Next 10 Years
Written by Andrew Button at The Motley Fool Canada
Banking has been the big theme in the markets over the last week. Between the Silvergate collapse, the SVB implosion, and the recent Credit Suisse stock selloff, there has been a lot of panic in the financial services sector.
Historically speaking, markets like this one have been good ones to go shopping in. When stocks are beaten down and out of favour, as a group, they tend to be good buys. Currently, most bank stocks are down over the last month, both the strong ones and the weak ones. The strong banks that are falling with their struggling cousins are likely to be good buys right now.
In this article, I will explore one Canadian bank stock I bought and intend to hold for the next 10 years.
Toronto-Dominion Bank (TSX:TD) is Canada’s largest bank by assets and the second largest by market capitalization. It is primarily a retail bank that makes money taking deposits and issuing loans in Canada and the United States. To a lesser extent, it’s involved in investment banking, brokerage services, and insurance.
TD Bank’s main claim to fame is being the “most American Canadian bank.” 38% of its earnings came from the U.S. last quarter. After closing the deal to buy out Cowen, that percentage will likely to higher. TD also has a deal to buy out First Horizon, a bank in the U.S. southeast, but that deal might not close. If it did close, it would add another $1 billion in U.S.-sourced earnings, bringing TD’s U.S. earnings to nearly 50% of the total!
A dirt-cheap valuation
One of the reasons I like TD Bank right now is because its shares are cheap. At today’s prices, TD trades at
Nine times earnings;
Three times sales;
1.35 times book value; and
9.44 times cash flows.
This is a pretty modest valuation. The price-to-earnings ratio, in particular, is quite low if you compare it to competitors like Royal Bank of Canada. Also, TD’s dividend yield is now pushing 5%, so it has some serious income potential.
Despite its cheap valuation, TD Bank has delivered strong growth over the years. Over the last five years, it has grown revenue by 7.1%, earnings by 8.8% and free cash flow by 9.5% — all of these figures on an annualized basis. So, TD is growing. It’s also highly profitable, with a 31% profit margin and a 14.6% return on equity.
Lately, we’ve seen investors panic about bank stocks due to several bank implosions and issues at Credit Suisse. To be sure, many banks in the world are very risky right now. However, a few bad banks don’t mean that the entire sector is about to go belly up.
TD Bank and Canada’s other big banks are generally pretty safe, with lots of capital, growing earnings, and ample support from the government. They are not risk free: Canada’s housing market is pretty pricey, with many Canadians barely able to keep up with their mortgage payments. There could be turbulence ahead. Nevertheless, TD Bank is a highly diversified bank with plenty of cash to ride out a crisis.
The post 1 Deeply Undervalued Bank I’m Holding for the Next 10 Years appeared first on The Motley Fool Canada.
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Fool contributor Andrew Button has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.